Today, Sept. 28, 2012, Northern Trust introduced two new ETFs that tilt their weightings toward small-cap and value stocks. FlexShares Morningstar Developed Markets ex-U.S. Factor Tilt Index Fund (NYSEARCA:TLTD) and FlexShares Morningstar Emerging Market Factor Tilt Index Fund (NYSEARCA:TLTE) seek to enhance exposure to international stock markets through the multi-factor tilting process of the underlying indexes.
The products are based on the belief that a bias toward small-cap and value stocks offers greater long-term growth potential than that provided by a traditional market cap weighting. The new offerings apply to international markets the same concepts introduced a year ago for the FlexShares Morningstar U.S. Market Factor Tilt Index Fund (NYSEARCA:TILT). The underlying Morningstar indexes follow a four-step construction process of 1) defining the investable universe, 2) defining the "total market" portfolio of that universe, 3) assigning value scores and stock styles, and 4) applying the factor tilt.
TLTD applies a small-cap and value tilt to developed markets, excluding the U.S. Unlike the popular MSCI EAFE developed markets classification, TLTD also includes Canadian stocks. The fund’s capitalization allocations are large (58.3%), mid (16.7%), small (23.9%), and micro (1.1%). The value vs. growth ratio was not found.
TLTD has 1,336 holdings, with the largest positions being Nestle (1.2%), HSBC Holdings (1.0%), Novartis (0.9%), Vodaphone Group (0.9%), and BP (0.8%). The country breakdown has Japan at 20.4%, the U.K. at 16.9%, Canada at 10.9%, Australia at 7.6%, France at 6.7%, and Germany at 6.6%. The largest sector allocations include financials (23.6%), industrials (14.5%), consumer discretionary (12.3%), materials (11.0%), and consumer staples (9.5%).
TLTE applies a small-cap and value tilt to emerging markets. The largest country allocations include South Korea at 15.9%, Taiwan at 13.4%, Brazil at 12.1%, South Africa at 9.9%, Hong Kong at 9.2%, and at China 8.7%. It’s not clear why Hong Kong is included, since it is a developed market and is represented in TLTD. My presumption is that it represents China stocks listed in Hong Kong. Capitalization allocations are large (47.9%), mid (19.6%), small (29.2%), and micro (3.4%).
TLTE has 1,056 holdings, with the largest positions being Samsung Electronics (2.8%), Taiwan Semiconductor Manufacturing (1.5%), China Mobile (1.5%), Gazprom (1.3%), and America Movil (1.1%). Top sector exposures include financials (22.2%), technology (13.8%), materials (12.9%), consumer discretionary (10.7%), and energy (10.5%).
Disclosure: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.